venerdì 5 febbraio 2010

Monetary policy Update: a review of CB's Meeting over the past week

The ECB decision to leave rates unchanged at 1% at the end of last week’s monetary policy meeting was widely expected. Addressing the press after the meeting, President Trichet reiterated the outlook depicted at last month’s monetary policy meeting with respect to a cautious approach to current recovery, emphasizing the temporary nature of the stimulus and strengthening the view that inflationary pressures would remain subdued in the medium-term. However, the most important element of the press conference was Trichet’s indication that in March “the Governing Council will take decisions on the continued implementation of the gradual phasing out of the extraordinary liquidity measures that are not needed to the same extent as in the past”. As regards the interest rate outlook following last week’s ECB monetary policy meeting, we see no reason to alter our estimate that rates are likely to remain unchanged, at least until the end of H1 2010, where they should gradually climb to 1.5% by the end of 2010, in line with our projections on downside risk.

Following last week’s monetary policy meeting, the BoE announced its widely-expected decision to leave rates unchanged at 0.50% and to pause its asset purchase program totaling GBP200bn. In a statement released after the meeting, the BoE said that “the Committee will continue to monitor the appropriate scale of the asset purchase program and further purchases would be made should the outlook warrant them.” It appears that the BoE is keeping the door open for a possible expansion of the program, though it does not expect to do so at this stage. The Inflation Report due for publication last week will give more information on the BoE’s economic outlook for the months ahead.

The Norges Bank decided to leave rates unchanged at 1.75% at the end of last week’s monetary policy meeting. The CB indicated that “activity in the Norwegian economy has increased, but capacity utilization is still lower than normal”. Other important factors influencing the outlook of monetary policy were “house price inflation is high and growth in household credit remains relatively strong” and “at end-January” the Krone was a good 1.3% stronger than projected for the first quarter in the October 2009 Monetary Policy Report. The result of last week’s meeting is in line with our base scenario; hence the Norges Bank should increase rates to 2% at the next monetary policy meeting scheduled on 24 March. According to our estimated equilibrium rate model, the NB’s ever-tightening monetary policy is likely to continue in the months ahead: the Key rate may rise to 2.75% by year-end.

The Reserve Bank of Australia (RBA) surprised markets by deciding to leave rates unchanged at 3.75% during last week’s monetary policy meeting. This came after having increased them by 0.25% in each of the last three monetary policy meetings in 2009. All 20 economists in the Bloomberg survey predicted a rate hike.

In the press release published at the end of the meeting, Governor Glenn Stevens explained that “since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being”. However, Stevens added that “interest rates to most borrowers nonetheless remain lower than average. If economic conditions evolve broadly as expected, the Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term”. Although, last week’s decision to leave rates unchanged came as a surprise, we believe that further rate hikes in the months ahead are still a clear possibility. Moreover, should employment and home loans data, which are due for publication sometime next week, come out higher than expected, the RBA may decide to raise rates again at next month’s monetary policy meeting.

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I am an economist with several years of experience in the investment banking field. From 2001 to 2007 I worked at Rasbank (now Allianz Bank) where I covered the US and Eurozone economies, Federal Reserve’s and ECB’s monetary policies. I also provided monthly an international asset allocation for the major international equity and bond markets. From 2007 to early 2009 I was an economist in the European economic team at Dresdner Kleinworth, covering Italian, Scandinavian and Swiss economy.
This brand new blog contains my opinions on global economic developments and financial market trends. I will focus mainly on European economies, though excursuses on the global market places will be frequent. I may have direct or indirect interests in various financial instruments discussed in the blog. The commentary in this blog in no way constitutes a solicitation of business or investment advice.